Mendoza School of Business

New Deals With Old-Style Risk

Published: June 6, 2011 / Author: Steven Davidoff

The following is an excerpt from an article in the New York Times that
mentions the paper that the author co-wrote with Matt Cain, assistant professor
of finance.  To read the entire article
visit: New Deals With Old-Style Risk

Risk-taking is back in mergers and acquisitions.

The evidence is in two recent announced deals: Sealed Air’s $4.3 billion
purchase of Diversey Holdings and Ashland’s $3.2 billion purchase of
International Specialty Products. Both transactions show that the financial
crisis is now memory and strategic acquirers are willing to take on substantial
leverage to complete deals. But all is not the same as before. These deals also
show how transaction terms have shifted in response to the crisis.

The financial crisis taught harsh lessons. The most prominent transaction
collapse involving a strategic acquirer and target was Finish Line’s highly
leveraged effort to acquire Genesco. Finish Line faced bankruptcy when its
financing to acquire the larger Genesco collapsed. The reason was that Finish
Line failed to negotiate any financing condition in its contract with Genesco.

Genesco sued in a Tennessee court to force Finish Line to complete the
transaction, a case Genesco won at the trial court level. Genesco and Finish
Line subsequently settled their dispute and terminated the combination, at a
cost of about $70 million to Finish Line.

Finish Line was lucky to pay so little, and was able to do so only when it
became clear that the acquisition would indeed bankrupt Finish Line. Both
companies were left heavily damaged by the dispute.

The aborted Finish Line/Genesco deal highlighted the problem of uncertain
financing during the financial crisis. This was a problem that hit private
equity particularly. In a new paper that I have co-written with Matt Cain and
Antonio Macias, we estimate that private equity deals constituting $168 billion
in 2007 alone were terminated during the financial crisis. Terminations of
strategic transactions were far fewer in number and value.



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